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Study Small biz hit by fraud change finance behavior

PLEASANTON, Calif. (9/15/11)--Small businesses are experiencing more identity fraud, which can affect credit unions serving them in two ways: through losses stolen from the business owner's accounts with the credit union, and through lost revenue after the business owners adjust their financial habits as a result of the fraud, said a recent study. Small businesses are attractive to fraudsters because they conduct a myriad of transactions that often span both business and personal accounts, said Javelin Strategy & Research in a report issued recently on how small business fraud impacts financial institutions' revenues and retention of business. Last year, 4.1% of small businesses were hit with $8 billion in fraud. That compares with 3.5% of consumers hit by identity theft fraud. Financial institutions, merchants and other providers absorbed at least $5.42 billion of that loss, while the cost to the business-owner victims totaled $2.61 billion, said Javelin. The mean amount of the small business fraud--the total dollar amount divided by the number of victims--was $4,851 for small businesses, with the mean out-of-pocket expense for the victim at $1,574. Identity fraud cost consumers $631 out of pocket during the same time. Small business owners "face significant financial losses as well as other issues as a result of fraud," said Philip Blank, senior analyst risk, fraud and security at Javelin. They have "higher legal costs and longer timeframes for resolution of fraud than consumers." They also do not have the same zero liability fraud guarantees that online banking consumers receive from their financial institutions. Credit unions, banks and credit card companies who partner with small businesses that become victims of fraud not only absorb billions of dollars in financial losses, but also lose the small business as clients, the Javelin report said. As a direct result of a fraud, more than 20% of small business owners switched credit card issuers, and nearly the same percentage switched financial institutions. Javelin also reported that about 32% refused to bank online and reverted back to writing checks, which drove up financial institutions' costs. "These changes create a significant amount of churn and lost revenues for financial institutions and issuers, as small business owners tend to have a higher transaction rate than the general consumer and often generate significantly more fees and charges for the financial institution or issuer," said Javelin. Because credit unions and card issuers have a vested amount, Javelin recommended that financial institutions and card issuers offer more real-time and comprehensive alerts for the business's credit, debit and demand deposit accounts, as well as fraud avoidance software, identity theft protection and credit monitoring services. "Selling anti-fraud and security services not only helps small business owners prevent fraud, but also generates revenue for the financial institutions and issuers," said James Van Dyke, president and founder of Javelin. Here are some of the schemes that recently targeted small businesses, according to The Salt Lake City Tribune (Sept. 12):

* Con artists rented an office in the same building as a California law firm and used the firm's address, but with a different suite number, to buy $70,000 worth of computers and office furniture delivered on the law firm's line of credit. The thieves simply reloaded the furniture into a truck and disappeared. * Thieves use or alter information from business registrations with state governments to open lines of credit so they can buy goods that can be easily resold for cash. In Colorado, scam artists from California revived the Secretary of State registration of a defunct company and used the name of the former owner as an officer, then took out lines of credit, ordered goods, and disappeared with what they bought on the stolen credit. * Thieves targeted "big box" stores and computer companies to buy goods with stolen credit card numbers or lines of credit. In the case of a cell phone company, they bought phones on credit. * In Pennsylvania, thieves placed malicious software on a school district's computer system and used information from the breach to steal $700,000 from the district's bank accounts in 74 transactions over two days.